F1

Question 1

Criteria that a component of an entity must meet to be reported in discontinued operations

Answer 1

1. Management commits to a plan to sell the component.
2. The component is available for immediate sale in its present condition.
3. An active program to locate a buyer has been initiated.
4. The sale of the component is probable and the sale is expected to be completed within one year.
5. The sale of the component is being actively marketed.
6. It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.

Question 2

Gains and losses from fixed asset sales are reported

Answer 2

Showing the total gain as part of continuing operations, not net of income taxes. using the net concept, but are not included in discontinued operations because a fixed asset is not considered a component of an entity. Discontinued operations are only reported for the disposal of a component of an entity.

Question 3

Gain or Loss on disposal of the component

Answer 3

1. Date of product line sale does not matter as long as it was sold during the year.
2. Gain/Loss on disposal calculated based on the selling price vs the carrying value at the time of sale.
3. Gain/Loss would be reported under the heading “discontinued operations”.
4. Gain/loss would be netted and reported in the period it occurred.
5. No future estimates for the results of operations and gain/loss on disposal are made.

Question 4

According to the FASB conceptual framework, comprehensive income includes

Answer 4

1. Net Income (continuing operations & discontinued operations).
2. Other Comprehensive Income (Pension Adjs, Unrealized Gain/Loss for AFS Debt Securities and Hedges, Foreign Currency, Instrument-Specific Credit Risk)

Question 5

All components of comprehensive income are closed to the balance sheet

Answer 5

1. Net Income is closed to Retained Earnings.
2. Other Comprehensive Income is closed to Accumulated Other Comprehensive Income (component of stockholders’ equity on the balance sheet).

Question 6

Comprehensive income is

Answer 6

the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners (Treasury stock transactions- OWNER)

Question 7

The balance in the accumulated other comprehensive income account at the end of the current year is a debit balance. Where in the financial statements should the balance be properly shown?

Answer 7

In the balance sheet as a reduction of equity. Accumulated other comprehensive income includes increases and decreases year-to-year, and is a balance sheet equity account.

Question 8

Income from continuing operations is equal

Answer 8

Operating income(Rev & Exp) + Nonoperating income (Gain &Losses)

Question 9

When translating a foreign financial statement, where would the gains and losses from remeasurement and translation be reported?

Answer 9

Under the remeasurement method, currency gain or loss is included in the net income of the company. Under the translation method, the gain or loss is included as a part of other comprehensive income. In both cases, the amount of the gain or loss is calculated as a “plug” amount necessary to make the financial statements balance.

Question 10

Reclassification adjustments must be shown in the financial statement that discloses comprehensive income:

Answer 10

Reclassification entries may be necessary to avoid double counting an item previously reported as comprehensive income (i.e., unrealized gain), which are now reported as part of net income (i.e., realized gain).

Question 11

comprehensive income to decrease

Answer 11

Comprehensive income is calculated as net income plus other comprehensive income. An unrealized loss on a trading security will be recorded as a loss on the income statement, which will reduce net income and therefore comprehensive income.

Question 12

All of the following are accurate required disclosures when reporting accumulated other comprehensive income and other comprehensive income (under all formats)

Answer 12

1. Report total accumulated other comprehensive income on the balance sheet as an item of equity.
2. For each component of other comprehensive income, report the changes in the accumulated balances.
3. Reclassification adjustments, and their effect on both net income and other comprehensive income, are reported in the footnotes.
4. The tax impact of each component included in the current year’s other comprehensive income must be reported.

Question 13

The single-step income statement will include in total revenues

Answer 13

all sales of goods, services, and rentals. Purchase discounts are not included in revenue, but instead reduce cost of goods sold. The recovery of accounts written off does not hit the revenue account.

Question 14

Acela Co. reports $340,000 in accumulated other comprehensive income in Year 1. In Year 2, the company recorded the following:

Foreign currency translation loss: 30,000
Unrealized gain on available-for-sale debt security: 10,000
Unrealized loss on available-for-sale equity security: 10,000
Amortization of actuarial pension loss:15,000
Actual return on pension plan assets: 65,000

Acela Co.’s Year 2 balance in accumulated other comprehensive income will be:

Answer 14

The beginning balance of $340,000 in accumulated other comprehensive income (AOCI) will be decreased by the $30,000 foreign currency translation loss, and increased by the unrealized gain on the available-for-sale debt security of $10,000 and the amortization of the actuarial loss on pension plan assets of $15,000. The balance in Year 2 will therefore be: $340,000 − $30,000 + $10,000 + $15,000 = $335,000. The actual return on pension plan assets is not specifically a part of AOCI.

Question 15

Bell Products Inc. has the following amounts on its unadjusted year-end trial balance at the end of Year 2
Debit Credit
Change from FIFO to weighted average method of inventory valuation
10,000
Prior service cost—pensions
35,000
Gain from sale of available-for-sale securities
27,500
Loss from infrequent item
18,000
Gain on foreign currency translations
11,500

What is the amount to be shown in Bell’s accumulated other comprehensive income at the end of Year 2?

Answer 15

Prior service costs are included in other comprehensive income until recognized in a later period as a component of pension expense.

Foreign currency translation adjustments are reported as an item of other comprehensive income until the sale or liquidation of the investment in a foreign entity.

A change in accounting principle is shown as an adjustment to retained earnings at the beginning of the year. It is not an item of other comprehensive income.

Gains from sale of available-for-sale securities are part of net income. Only unrealized gains and losses from available-for-sale securities are components of other comprehensive income.

A loss from an infrequent item is a part of net income (income from continuing operations), not a component of other comprehensive income.

Question 16

How should the gains and losses from changes in the fair value of the following types of foreign currency transaction hedges be reported in the financial statements?

Answer 16

Gains and losses from changes in fair value of foreign currency transaction hedges classified as fair value hedges are accounted for in earnings as are other fair value type hedges. Gains and losses from changes in the fair value of foreign currency transaction hedges used to hedge a net investment in a foreign operation are reported in other comprehensive income as part of the cumulative transaction adjustment.

Question 17

SEC required forms

Answer 17

The Form 10-K (annual report) must include audited financial statements.
The Form 6-K (semi-annual report),
Form 8-K (material events and corporate changes)
Form 10-Q (quarterly report) do not require audited financial statements.

Question 18

When computing diluted earnings per share, convertible securities are:

Answer 18

Recognized only if they are dilutive.

Rule: Convertible securities are recognized when computing diluted EPS only if the conversion is dilutive.

Question 19

In a reverse stock split

Answer 19

the number of shares outstanding is reduced. So if 450,000 shares were outstanding prior to the split, and the reverse stock split is 1 for 3, there will be 150,000 shares outstanding after the split. For the purposes of calculating weighted average common shares outstanding for both the basic and diluted EPS calculations, stock splits and reverse stock splits are treated as if they happened at the very beginning of the year; they are not prorated for portions of the year.

Question 20

What changes will have to be made to Carlton’s income statement as a result of the omission of the earnings per share data?

Answer 20

income statement will have to be revised to include the earnings per share data. All public entities must present earnings per share on the face of the income statement. In a simple capital structure, basic EPS for income from continuing operations and net income are presented. In a complex capital structure, basic and diluted EPS must be presented for income from continuing operations and net income.

Question 21

In determining earnings per share, interest expense, net of applicable income taxes, on convertible debt that is dilutive should be:

Answer 21

Added back to net income for diluted earnings per share, and ignored for basic earnings per share. Interest expense (net of income tax) on debt considered would be added back to the numerator for diluted EPS if the effects are dilutive.

Question 22

To compute income available to common shareholders.

Answer 22

Preferred dividends must be subtracted to compute income available to common shareholders, the numerator of the EPS formula.

Question 23

Convertible bonds are antidilutive if

Answer 23

converting them into common stock increases earnings per share above basic earnings per share. To determine whether the bonds are antidilutive, the interest savings (after removing the tax benefit of tax-deductible interest) is divided by the number of new shares created.

Question 24

If stock dividend or a stock split (or reverse split) changes common stock outstanding

Answer 24

the computation of EPS shall give retroactive recognition for all periods presented (END OF PERIOD BEFORE FS ISSUED) using the new number of shares because the reader’s primary interest is presumed to be related to current capitalization.

Question 25

following events is required to be reported to the United States Securities and Exchange Commission on Form 8-K

Answer 25

A. The unregistered sale of equity securities.
B. A change in a registrant’s certifying accountant.
C. The creation of an obligation under an off-balance sheet arrangement of a registrant.

Question 26

When calculating the weighted - average number of shares to be used in the earnings-per-share calculation

Answer 26

stock dividends are treated as if they occurred at the beginning of the period.

Question 27

Smaller reporting companies, which are entities with annual revenues of less than $100 million

Answer 27

are excluded from the definition of large accelerated filers or accelerated filers.

Question 28

An accelerated filer is an issuer:

Answer 28

1. with a public float of greater than or equal to $75 million;
2. subject to the Securities Exchange Act’s reporting requirements for greater than or equal to 12 months;
3. that previously filed at least one report;
4. which is not eligible to file quarterly and annual reports on Forms 10-QSB and 10-KSB.

Question 29

Out of the money stock options are antidilutive

Answer 29

because the exercise price exceeds the market price of the stock ( Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share).

Question 30

Under U.S. GAAP, earnings per share data should be reported for:

Answer 30

If the entity reports a discontinued operation, the entity presents the basic and diluted (if applicable) per share amounts for those items either on the face of the income statement or in the notes to the financial statements. Basic and diluted per share amounts for income from continuing operations and for net income should be presented on the face of the income statement (or statement of income and comprehensive income if the entity is using the one-statement approach) with equal prominence.

Question 31

On December 1 of the current year, Clay Co. declared and issued a 6 percent stock dividend on its 100,000 shares of outstanding common stock. There was no other common stock activity during the year. What number of shares should Clay use in determining basic earnings per share for the current year?

Answer 31

A 6 percent stock dividend equals 6,000 shares with a total of 106,000 shares outstanding after the distribution of the dividend. Stock dividends and stock splits require restatement of the shares outstanding before the stock dividend or stock split. Thus, the stock dividend would be treated as if it had occurred at the beginning of the fiscal year.

Question 32

Which one of the following is considered contingent shares for purposes of computing EPS?
These shares are contingent shares as they are issuable for no cash consideration after the occurrence of the specified condition.

Answer 32

1. Shares issuable upon the passage of a specific period of time.
2. Shares issuable upon the issuance of a patent.
3. Shares issuable upon achieving a specific net income target.

Question 33

Which one of the following is not considered contingent shares for purposes of computing EPS?

Answer 33

Shares issuable upon the exercise of a stock option are not considered contingent shares as the option holder is required to pay the strike price to exercise the options.

Question 34

Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

Answer 34

Income available to common shareholders is determined by deducting dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared).

Question 35

For interim financial reporting, income taxes uses an effective tax rate expected to be applicable for the full fiscal year should reflect:

Answer 35

anticipated foreign tax rates and available tax planning alternatives. In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.

Question 36

The treasury stock method presumes that

Answer 36

option proceeds can be used to reacquire shares on the open market and that any option requirement will be satisfied by the issuance of new shares to be held in the treasury. Treasury shares themselves do not have an impact on the calculation.

Question 37

Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.

Answer 37

If the ten percent convertible bonds are converted, the company will save $70 on each bond ($1,000 x .10 x (1 - .30)) and 20 new shares of stock will be issued. This equates to $3.50 per 1 new share, which is a higher ratio than $1.29 basic per share. So these securities will be anti-dilutive.

Question 38

Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.

Answer 38

If the convertible preferred stock is converted, the company’s earnings per share will increase in the numerator by the $6 dividend that will no longer be paid, while the denominator will increase by 4 for the new shares of common stock issued. That equates to $1.50 per share, which is a higher ratio than $1.29 basic per share. So these securities will be anti-dilutive.

Question 39

Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.

EPS Delutive= NI+ Interest on delutive security( net of tax)/ WAOCS)

Answer 39

A dilutive security will produce an earnings per share number below basic earnings per share. The formula for basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Basic earnings per share is $1.29, and a dilutive security will result in a lower earnings per share number. If the seven percent convertible bonds are converted, the company will save $49 on each bond ($1,000 x .07 x (1 - .30)), but 40 new shares of stock will be issued. This equates to $1.225 per 1 new share, which is a lower ratio than $1.29 per share. So these securities will be dilutive.

Question 40

In preparing its interim financial statements, assuming that no changes in accounting principle were implemented, Pro Tem Corporation would apply generally accepted accounting principles:

Answer 40

Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year unless a change in accounting principle is adopted in the current year.

Question 41

U.S. Securities and Exchange Commission (SEC) regulations

Answer 41

1. Regulation S-X sets forth the form and content of and requirements for interim and annual financial statements
2. Regulation S-T sets forth rules governing electronic filings.
3. Regulation S-B sets forth the disclosure requirements for small business issuers.
   4.Regulation S-K sets forth non-financial reporting requirements for various SEC filings used by public companies.

Question 42

Which of the following items, if dilutive and if other conditions are met, would enter into the determination of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS) calculation?

Answer 42

Contingent shares (that are dilutive) are included in the calculation of basic earnings per share (EPS) if (and as of the date) all conditions for issuance are met. Stock options do not enter into the calculation of basic EPS, but will enter into the calculation of dilutive EPS if dilutive (i.e., the average market price of the common stock during the period exceeds the exercise price of the option).

Question 43

Under the cost method, If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:

Answer 43

1. There is no gain or loss on the purchase and/or sale of treasury stock. Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”
2. The firm’s net income is never affected when the shares are reissued at a higher (gain) or lower (loss) price
3. incorrectly recognized a gain from the issuance of the treasury stock will overstated net income for the current period.

Question 44

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?

Answer 44

Using the cost method, the treasury stock transactions include the reissuance of the treasury shares at $10 per share ($4 per share to APIC x 500 shares = $2,000). The additional paid-in capital from the original issuance of the stock is not paid-in capital related to the treasury stock and is not included. The gain is correctly calculated as the difference between the resale price and the reacquisition price. Additionally, gains on treasury stock transactions are credited to APIC-Treasury Stock, not to retained earnings.

Question 45

Cumulative preferred stock dividends are

Answer 45

paid on par value (not sales price) of preferred stock and have a “preference” over common stock dividends until all past preferred stock dividends are paid. At December 31, Year 1 and Year 2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock. 6% preferred stk div (4,000 sh x $100 x 6%)= $24,000.

Question 46

Treatment of treasury stock on a firm’s financial statements?

Answer 46

1. When a firm repurchases its shares of stock, it may reissue this treasury stock at a reissue price above or below its repurchase price depending on market and firm specific factors.
2. The cost method is used approximately 95 percent of the time by firms accounting for treasury stock transactions.
3. Treasury stock is a contra-equity account that reduces reported stockholders’ equity on a firm’s balance sheet.
4. Net income is not affected by gains or losses from treasury stock transactions. It should be noted that although gains on treasury stock transactions also will not impact retained earnings, losses may affect the firm’s retained earnings account.
5. There is no gain or loss on the purchase and/or sale of treasury stock. Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”

Question 47

UNDER THE LEGAL METHOD

Answer 47

TREASURY SHARES ARE DEBITED (IF PURCHASED FOR MORE THAEN ORIGINAL PAR), APIC CREDIT FOR GAIN OR DEBIED FOR LOSS (ORIGINAL ISSUE PRICE - CURRENT PRICE) LOSSES MAY DECRESE RETAINED EARNINGS IF APIC TREASURY STOCK DOSNT HAVE ENOUGH BALANCE.

Question 48

A retained earnings appropriation can be used to:

Answer 48

A “retained earnings appropriation” can be used to restrict earnings available for dividends.

Rule: A retained earnings appropriation debits (reduces) “unappropriated retained earnings” and sets up (credits) “appropriated retained earnings.” It does not affect the income statement.

Question 49

On December 1, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock’s market value was $35 per share. The stock was originally issued for $25 per share. By what amount would this donation cause total stockholders’ equity to decrease?

Answer 49

$0 decrease in total stockholders’ equity due to donation of its own stock from a stockholder because there is no cost to the corporation. The entry would be:

Debit (Dr) Credit (Cr)
Donated treasury stock (@ FMV)
Additional paid-in capital (@ FMV)

Question 50

Effect of donated (treasury) stock from a shareholder to the company?

Answer 50

1. A donation of common shares to a company reduces the number of common shares outstanding.
2. When common stock is donated by a shareholder, the book value per common share increases, while the number of shares outstanding decreases.
   3.The company records donated common stock received from a shareholder at fair value.

Question 51

The acquisition of treasury stock at a price less than their book value will:

Answer 51

1. Decrease stockholders’ equity in total. All treasury stock transactions decrease total equity.
2. Increase book value per share. Book value per share is based on the number of outstanding common shares, which is reduced by the acquisition of treasury stock (the denominator is reduced). The numerator (book value) is also reduced by the cost to purchase the shares, but the overall effect on the ratio is an increase in book value per share. For example, if book value were $1,000 and there were 100 common shares, the book value per common share would be $10. If 10 shares were repurchased for $8 (which is less than the original book value per share), the new book value would be $920 and the reduced number of shares would be 90, thus, resulting in a new book value per common share of $10.22, which is larger than the original $10.

Question 52

A firm repurchases 10 percent of its outstanding common stock. What is the effect of this treasury stock transaction?

Answer 52

1. The repurchase of common stock reduces total stockholders’ equity as well as the total capital available to a firm, resulting in a higher debt-to-total capital ratio as total debt remains unchanged.
2. Repurchasing its common stock outstanding will lower total stockholders’ equity, as the treasury stock is recognized as a contra-equity account.
3. Treasury stockholders are not entitled to the rights of ownership provided to common stockholders, which typically include the right to vote and receive dividends.
4. A firm that repurchases its common stock may subsequently reissue these treasury shares.

Question 53

statement regarding the cost method versus legal (par/stated value) method when accounting for treasury stock transactions?

Answer 53

1. A primary difference between the cost method and legal method is the timing of the recognition of gains or losses on treasury stock transactions.
2. Treasury stock shares are recorded and carried at their reacquisition cost under the cost method.
3. The gain or loss from treasury stock transactions is recognized as a direct adjustment to stockholders’ equity under the cost method (and legal method) and is not part of the company’s net income.

Question 54

Which of the following financial instruments issued by a public company should be reported on the issuer’s books as a liability on the date of issuance?

Answer 54

Common stock that contains an unconditional redemption feature should be reported on the issuer’s books as a liability on the date of issuance because there is an obligation of a cash outflow in the future that the company has no ability to prevent.

Question 55

Cumulative preferred stock dividends:

Answer 55

Dividends are not reported as a liability until the dividends are declared. The total amount of dividends in arrears includes both the Year 2 and Year 3 accumulated dividends, less the dividend paid, because the dividends are cumulative.

Question 56

Each of the following transactions will cause a decrease in stockholders’ equity

Answer 56

1. A loss from a foreign currency translation adjustment results in a decrease to other comprehensive income, which decreases accumulated other comprehensive income, which decreases stockholders’ equity.
2. The declaration of a cash dividend results in a decrease in retained earnings, which decreases stockholders’ equity.
   3.A loss on the sale of a discontinued segment results in a decrease in net income, which decreases retained earnings, which decreases stockholders’ equity.

Question 57

Dividend income
= No. of shares × dividend per share

Answer 57

Receipt of a stock dividend is not revenue. It increases the number of shares held and decreases the cost basis per share, but is not recorded as dividend income. Stock dividends are not recorded as income on the books of the recipient.

Question 58

At which of the following dates would the dividends become a liability

Answer 58

Dividends become a liability on the books of the issuing company (along with a charge to retained earnings) on the date the dividend is declared. The date of payment is the date that the liability is removed from the books and the actual cash dividend is paid out to the shareholders established on the date of record. The date of declaration is the date the board of directors formally approves a divided. A liability is created (dividends payable), and retained earnings is reduced (debited).

Question 59

When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of:

Answer 59

When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of declaration by the board of directors.

Question 60

total number of shares of common stock that the entity has outstanding at the end of Year

Answer 60

1. Treasury stock is resold (the stock is regarded as outstanding because after the resale, the stock becomes stock held by shareholders other than the corporation itself.)
2. Number of common stock outstanding
3. The issuance of new shares of common stock
4. Stock Dividends (% *# outstanding stock)
5. The stock split doubles the number of outstanding shares

Question 61

stockholders’ equity should report:

Answer 61

Common and preferred stock are recorded at the number of shares issued times stated or par value. Any excess is paid-in capital.

Question 62

A property dividend should be recorded in retained earnings at the property’s:

Answer 62

market value at date of declaration. Retained earnings are “decreased” when property dividends are “declared.” Use FMV of asset (not cost) to reduce retained earnings when property dividend is declared. The cost of asset will be adjusted to FMV (difference treated as “gain or loss on disposal of asset”) when a property dividend is declared. Retained earnings is reduced for both cash and property dividends.

Question 63

All of the following distributions to stockholders are considered asset or capital distributions

Answer 63

A. Cash dividends.
B. Property distributions (e.g., of a fixed asset)
D. Liquidating dividends (return of capital and therefore a capital distribution)

Question 64

liquidating dividend

Answer 64

The dividend is liquidating to the extent that the dividend exceeds retained earnings.

Question 65

For a large stock dividend

Answer 65

A 30% common stock dividend would be classified as a large stock dividend by GAAP because the stock dividend is more than 20% to 25% of the previously outstanding shares. For a large stock dividend, retained earnings is debited for the par value of the additional shares issued.

Question 66

How would a 5% stock dividend affect each of the following?

Answer 66

Rule: A stock dividend (less than 20-25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total stockholders’ equity because all transfers take place within stockholders’ equity.

Question 67

When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as:

Question 68

Dividends declared and paid in the form of assets other than cash are

Answer 68

Recorded by the distributing corporation at fair market value at date of declaration. A loss is recognized for the merchandise’s carrying amount over its market value. This results in a reduction in income from continuing operations. The loss is not reported net of tax and would not be reported separately unless it was unusual or infrequent and material in amount.

Question 69

Under U.S. GAAP, earnings per share data should be reported for:

Answer 69

If the entity reports a discontinued operation, the entity presents the basic and diluted (if applicable) per share amounts for those items either on the face of the income statement or in the notes to the financial statements. Basic and diluted per share amounts for income from continuing operations and for net income should be presented on the face of the income statement (or statement of income and comprehensive income if the entity is using the one-statement approach) with equal prominence.

Question 70

At December 31, Year 1, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in Year 2 at a total cost of $1,500,000. In Year 2, Eagle appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in Year 3. In its Year 2 balance sheet, Eagle should report what amount of appropriated retained earnings?

Answer 70

Choice “B” is correct. $1,200,000 appropriated retained earnings at Dec. 31, Year 2 (for the construction of a new plant only). When the purpose of the appropriation has been achieved, it should be restored to unappropriated retained earnings.

Choice “A” is incorrect. “Cash restricted for the retirement of bonds” (an asset account called “sinking fund cash”) typically reduces regular cash and does not affect retained earnings. (There may also be an appropriation, but this would have to be specifically mentioned in the question.)

Choices “D” and “C” are incorrect. When the new ($1,500,000) office building was completed in Year 2, $1,750,000 was restored to unappropriated retained earnings.

Question 71

When a company decides to sell a component or division of the business that qualifies for discontinued operations treatment

Answer 71

all impacts to net income are reported as discontinued operations. This includes total revenues and expenses from operations for the year, as well as the gain or loss resulting from the sale of the division.

Question 72

A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?

Answer 72

No entry is made when the rights are issued since no consideration is given. If the rights are exercised and stock is issued, then common stock and additional paid-in capital increase.